The background for this is that U.S. dollar fundamentals are simply terrible. Helicopter Bernanke and his colleagues are debasing the value of the dollar at a very rapid pace in order to bail out a few failed Wall Street bankers. Meanehile the real economy is rapidly deteriorating, interest rates are lower than elsewhere even as America remains a large capital importer. There's something very wrong and unsound when a capital importer provides lower return on capital than elsewhere.

Yet, the currency market have for weeks been in denial about this, dreaming up fantasies about ECB rate cuts unlikely to occur (Inflation is rising in the euro area and is well above the ECB target. And while the ECB is inflationist they aren't fully as crazy as the Fed) and even in the unlikely event that they did occur would anyway be much lower than Fed rate cuts. Some analysts have even taken the failure of the dollar to fall significantly after the Fed rate cuts in late January as a bullish sign for the dollar. I would argue that it is a case of denial about fundamentals. But while markets are driven by sentiment in the short-term, fundamentals tend to catch up eventually. This is what has begun to happen in recent days, and which will continue during coming months. The euro will therefore likely rise to at least $1.55.

5 Comments:

Hartman said...

So now the rout begins-- automatic sell orders will now likely push the dollar down even more, for the reasons you mention as well as others.

Incidentally, as someone who works in the sciences, I've been noticing lately that just about all the Europeans have been returning back home to Europe. Especially the Germans-- it's just now worth it for them anymore to work in the USA, costs are too high here and the dollar is useless. Much better to earn money in Euros.

Even the Asians-- the Koreans, Chinese, Indians-- are all returning home, dollar plummeting vs. their currencies as well.

Heck, even a number of my American friends have been emigrating in the past couple years, mostly to Germany if they have a science or engineering background and know at least some German I guess.

I feel as though I'm witnessing the USA's decline into a banana republic. And with us likely soon losing the wars in both Iraq and Afghanistan, as they continue to drain us-- even before the Baby Boomers retire-- it's only gonna get worse.

So I guess China's gonna be ruling the world sooner than we thought.

I guess imperial overstretch does that to a place. Rome had its lessons to offer us, right before our very eyes, and we stumbled into the same blunders. Meet USA c. 476 A.D. as Odoacer and the barbarians prepare to assault the gates.

A gold standard is certainly the best alternative. Frozen dollar, which I interpret as a fixed money supply regime by the central bank would be great too, if the central bank would actually stick to that, but as we've seen with for example the ECB and the U.S. supreme Court, government institutions tend to ignore their self-imposed rules whenever they find it convenient, which is why it likely wouldn't work.

Fed independence is of course only one of the many illusions about central banking. And yes, central banking is a form of central planning basically incompatible with a true free market system.

stefan, i can do you one better: allow competing currencies. after people move away from the fiat dollar, the fed will become irrelevant and can be abolished. most of the banks will back their currencies with commodities (gold, silver, even oil). voila, free banking. government control of money, even under a gold standard, is too much control.

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